Many VC firms unprepared to prevent, manage sexual-harassment situations

Venture firms could be on the hook for failing to prevent sexual harassment, and not enough of them are taking steps to prevent it and to protect themselves from liability when it occurs, employment attorneys and insurers say.

Firms should enact clear anti-harassment policies in writing and conduct regular staff trainings, obtain insurance coverage, do deep background checks on new staffers and partners, and place detailed codes of conduct in partner agreements, attorneys say. But many firms fail to take such measures and are unprepared when accusations of misconduct arise.

“A lot of these firms are startups, and they may not have their act together in terms of having all their coverage,” said Kelly Armstrong, founding partner of the Armstrong Law Firm in San Francisco, which represents clients in employment cases against large companies. And it’s easy for partners to trust each other to behave professionally rather than include an explicit code of conduct in partner agreements, she said.

Recent allegations of sexual harassment, inappropriate behavior, or misconduct have prompted resignations from Justin Caldbeck of Binary Capital, Dave McClure of 500 Startups, Chris Sacca of Lowercase Capital, and Frank Artale of Ignition Partners, and they have drawn strong censure from others in the industry. Most widely-reported cases have involved male partners behaving inappropriately toward female startup founders, but Armstrong said there’s plenty of sexual harassment against both men and women in venture and tech, as well.

Such lawsuits vary widely and numerous factors determine whether a claim is made under employment or civil law, and whether individual partners, firms, insurers and even limited partners are liable.

“These cases are all fact-specific,” said Kathleen Lucas, an employment lawyer at Lucas Law Firm in San Francisco.

For example, unwanted touching or kissing could result in assault or battery charges. Refusing to fund a founder’s startup because she rebuffed a partner’s advances could be grounds for charges on interference with prospective economic advantage. Speaking negatively to others about a startup founder after she complained of sexual harassment could constitute defamation, Lucas said.

And if a firm hires a partner, knowing that he has been accused of sexual harassment, and it fails to investigate or prevent such behavior, it could be liable for punitive damages due to negligent retention and hiring, Armstrong said.

Prevention is protection

Firms should be proactive to prevent such harassment and discrimination before it happens, both attorneys said.

Although regular training about how to prevent sexual harassment is only required in California if a company has more than 50 employees, a firm can show that it’s committed to preventing sexual harassment by frequently training all of its employees, having detailed sexual harassment and anti-discrimination policies in place, and requiring all employees to read them.

Firms can also purchase multiple types of insurance coverage, including general business liability insurance, directors and officer’s insurance, and employment practices insurance. And partnership agreements with detailed expectations of behavior allow firms to exercise a zero-tolerance policy if a partner exhibits predatory behavior.

“Most partnership agreements will have verbiage that every partner will uphold high standards of ethics, but that’s too vague,” Lucas said. “It would be better to have a provision within the partnership agreement that says that everyone who comes to the firm to apply for funding will be treated equally.”

And it’s critical for firms to investigate previous allegations of sexual harassment against an investing partner before hiring him or her and to take steps to prevent such behavior while employed at the firm, even if the allegations are informal and no charges have been made.

“Say a firm is on notice that somebody has a proclivity toward inappropriate behavior and fails to prevent it, the firm could be liable for punitive damages and also general liability,” Armstrong said.

Many VC firms forgo insurance

Firms could protect themselves against damages from a sexual harassment suit by purchasing employment practices liability insurance, which is often bundled as part of management liability insurance. But many firms, especially smaller ones, often forgo the coverage for themselves, assuming that any liabilities would come from their portfolio companies, according to Lynne McCauley, managing director at the Spofford Group, an insurance brokerage firm that provides management liability insurance to private equity firms, hedge funds, banks and venture firms.

“VC firms, in particular, frequently don’t buy management liability insurance because they feel that the portfolio companies are where the exposure is and they themselves are not going to be sued,” McCauley said. “When they’re not very actively involved in portfolio companies, they tend to think they don’t have much risk. But that’s not the case.”

“Venture capital is a pretty clubby environment,” she said. “They’re risk takers by nature and don’t think they have the exposure. And yet particularly for VC firms, many of them are smaller firms that don’t necessarily have someone who’s a full-time HR person who’s making sure they’re following the rules and doing sexual harassment training. That’s where they get into hot water.”

McCauley estimated that annual costs for management liability insurance, including employment practices liability, start at $11,000 to $15,000 for $1 million in coverage.

If a firm has dealt with sexual harassment claims in the past, underwriters would assess the firm’s management’s response to the allegations to determine whether to increase premiums or drop the firm’s coverage.

“If they feel this is a one-off and you’ve done everything you should in terms of response to the actual claim, they’ll continue covering you but you’ll probably pay a lot more in premiums,” she said.

If the allegations are against the managing partner of the firm, it may not be able to purchase coverage or be offered a renewal, she added. “Underwriters may see it as a sinking ship and want off the risk.”

Need for new laws

Sexual harassment claims are often filed under employment law, which applies to employees of the same company. But many recent allegations involve partners harassing company founders who don’t work for the firm.

In such situations, non-employees would be entitled to a smaller award than employees would be. For an employment sexual harassment suit, the case can be filed under the California Fair Employment and Housing Act, which would allow the plaintiff to receive attorney’s fees with a potential multiplier in addition to the verdict.

“It’s a huge leverage against the employer,” Armstrong said. But if a non-employee sues a partner for sexual harassment under the civil statute, she is not entitled to recouping her attorney’s fees other than in the case of a few exceptions.

California’s FEHA, as well as the federal Title VII of the Civil Rights Act of 1964, make sexual harassment illegal in the workplace. But there are fewer statutes that would apply in cases where the sexual harassment was against a non-employee, and the recent scandals and resignations are making it clear that there’s room for new laws to be created to fill that gap, Lucas said.

“This problem has only surfaced, and we can see some other kinds of torts developing because of it,” she said. “It’s an area ripe for new laws to be made.”

A focus on integrity

But creating new laws and obtaining insurance coverage don’t address the root cause of sexual harassment, according to Kurt Betcher, an administrative partner at Norwest Venture Partners who oversees the operations functions of the firm.

“The best protection is setting the right tone across the entire organization, not only at the top but at all levels,” he said in an email. “So, a culture that articulates the importance of respect and decency is absolutely critical. This means a focus on integrity and thorough vetting of new partners and other new hires.”

Training is critical, he added, and insurance can’t protect against damage to a firm’s brand and reputation.

And imposing new laws and policies won’t effect a culture change if VCs are unwilling to follow them, according to Armstrong.

“Many of these guys are very young, precocious multi-millionaire innovative visionaries,” she said. “And they have big challenges in terms of observing certain boundaries.”

Photo of harassment documents with gavel courtesy of hafakot/iStock/Getty Images

CLARIFICATION: The above comment from attorney Kelly Armstrong on how non-employees in a harassment claim would be entitled to a smaller award than employees was clarified to show that a plaintiff can receive attorney’s fees with a potential multiplier in addition to the verdict.